Blackstone to Pay $1.7 Billion for The Cosmopolitan Hotel of Las Vegas

Craig Karmin, Kate O’Keefe and Eyk Henning were first with the news that private-equity firm Blackstone Group LP had agreed to pay $1.7 billion to Deutsche Bank for The Cosmopolitan of Las Vegas. The bank suffered a big loss on the sale after spending more than $4 billion to build the La Vegas strip hotel and casino, according to sources.

The story as it appeared on Dow Jones:
May 15, 2014, 9:53 AM EDT– Blackstone Agrees to Pay $1.7 Billion for The Cosmopolitan Hotel And Casino In Las Vegas — Sources

9:53 AM EDT: Deutsche Bank Sells At A Big Loss After Spending More Than $4B On The Project — Sources

Private-equity firm Blackstone Group LP has agreed to pay $1.7 billion to Deutsche Bank for The Cosmopolitan of Las Vegas, the glimmering but struggling 3,000-room hotel and casino on the Strip, Deutsche Bank said on Thursday.

The German bank spent about $4 billion to build the Cosmo, first as its lender and then as its owner after the project’s developer defaulted during the financial crisis. The sale represents one of the biggest losses on a single project that Las Vegas has ever seen.

Deutsche Bank, which has been grappling with falling profits and new banking rules, said in a written statement that the sale will have a “positive impact” on the bank’s Tier 1 capital ratio, which is a key measure of balance sheet strength that compares equity to assets weighted by riskiness. A spokesman for Deutsche Bank, Germany’s largest bank, declined to comment on the overall loss that it suffered.

The Cosmo, which opened at the end of 2010, has two high-rise towers, an 1,800-seat theater, more than a dozen restaurants, and a nightclub with 50-foot ceilings that’s popular with Las Vegas’ night life crowd. But many of its non-gambling amenities are owned by third parties, and it’s had difficulty making money on gambling because of its relatively floor and its lack of a database of high rollers that its rivals have.

Other bidders for the property included Australian gaming company Crown Resorts, led by billionaire James Packer. TPG Capital, Apollo Global Management and Caesars Entertainment Corp. also formed a venture to bid on the property, according to people familiar with the bidding process.

It’s not clear what Blackstone plans to do to turn around the Cosmo’s fortunes. The New York private-equity firm has scant experience in the casino business beyond some small exposure in Puerto Rico.

While Blackstone’s real estate group has bought and sold many hotels and hotel operating companies–including Hilton Worldwide Holdings Inc.’s initial public offering last year–the firm hasn’t run a large Las Vegas gambling operation.

But people familiar with Blackstone’s thinking said that it is betting on the Las Vegas comeback story that has been gaining momentum after a disastrous period that started with the financial crisis.

Deutsche Bank in 2012 formed an internal unit for unwanted assets to cut its balance sheet and improve its equity capital. The sale of the Cosmo will increase Deutsche Bank’s Tier 1 capital ratio by five basis points or 0.05%.

The lender’s ratio stood at 9.5% at the end of March, slightly down from the end of last year. The bank has set a target of at least 10% for the end of the first quarter in 2015.

Chief Financial Officer Stefan Krause said in late April that additional regulatory charges will weigh on the bank’s core Tier 1 capital ratio this year and that issuing new shares can no longer be excluded.

While the sale only marginally improves the bank’s capital cushion, it helps with its program shedding unwanted assets in the lender’s internal “bad bank.” The unit reduced assets in the unit to EUR49 billion at the end of March, down from EUR132 billion mid-2012, when the new Co-Chief Executives Anshu Jain and Jürgen Fitschen took over the helm.

Las Vegas’s group and convention business, which was hit the hardest during the recession, is showing signs of life. March saw 3.7 million visitors–the highest monthly total ever. Hotel room rates are back to prerecession levels and occupancy rates are topping 90%.

Las Vegas hotels have made efforts to court younger crowds with fine dining, art exhibits, cavernous nightclubs and luxury shops, and the Cosmo’s Marquee nightclub has become a popular attraction in the city.

The Cosmopolitan was originally designed by developer Ian Bruce Eichner to include luxury condominiums, but Mr. Eichner defaulted on a $760 million loan in 2008.

Deutsche Bank foreclosed on the property, just as construction had stalled because of the credit crisis. Faced with the challenge of trying to sell an unfinished residential project in the teeth of a housing market collapse, the bank opted instead to pour billions of dollars to develop Cosmo as a stylish hotel and casino. The property opened after delays and budget overruns.

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